Rishi Sunak has abandoned his predecessor’s plan to intervene in global energy markets by spending billions of pounds on foreign gas imports.
Sky News has learnt that Liz Truss’s Energy Supply Taskforce (EST), which was launched in September, is being scrapped.
Headed by Madelaine McTernan, who was director-general of the government’s COVID-19 Vaccine Taskforce, the energy supply initiative was set up to strike long-term deals aimed at bolstering Britain’s domestic energy security.
It came after the turmoil in energy markets triggered by Vladimir Putin’s invasion of Ukraine sparked record prices for British consumers, exacerbating the cost-of-living crisis.
Industry sources said this weekend that locking taxpayers into long-term contracts potentially lasting up to 20 years at current high prices had been rejected by Mr Sunak’s team.
In a statement in early September, Ms Truss’s administration said the EST had “begun negotiations with domestic and international suppliers to agree long-term contracts that reduce the price they charge for energy and increase the security of [UK] supply”.
Ms Truss’s aides described it at the time as a flagship reform which underlined her determination to get a grip on the UK’s energy crisis.
One insider said the government had been in talks with “a broad range” of potential suppliers.
Advertisement
Ms Truss’s ill-fated premiership ended just weeks later, however, prompting a review by her successor of her plan to intervene in energy markets.
Responding this weekend to an enquiry from Sky News, a government spokesman said: “While the government is continuing these efforts and remains completely committed to strengthening our energy resilience, we have concluded that direct purchases of gas are not the best intervention in the market.”
Earlier this month, Mr Sunak and the US President Joe Biden unveiled the UK-US Energy Security and Affordability Partnership, an initiative that both governments said would focus on reducing dependence on Russian energy exports.
A Whitehall source said on Saturday: “Winding down the taskforce is the right decision – while it was sensible in September for the previous administration to explore these contracts, locking-in long term contracts while gas prices are this high just doesn’t make sense.
“It was also only ever just one option on the table – there’s a whole range of other actions we’re taking now to boost the UK’s energy resilience, including a new £1bn energy efficiency scheme, financial backing for Sizewell C and reintroducing the Energy Security Bill to parliament.”
Nevertheless, the decision not to press ahead with Ms Truss’s plan will raise renewed questions about the country’s long-term energy security.
Earlier this month, ministers approved the Government Investment Decision to commit £700m to the development of the Sizewell C nuclear power station.
British imports of LNG accounted for 17% of the gas supplied to the UK through production and imports last year, according to data published by the Department for Business, Energy and Industrial Strategy.
The government has also acknowledged in recent months that it has been seeking long-term deals with foreign states understood to include Norway and Qatar – sparking concerns that Britain would pay a ‘security premium’ in exchange for guaranteed supplies.
The decision to disband the energy taskforce comes as Jeremy Hunt, the chancellor, is reported to be contemplating extending energy bill subsidies beyond the original March deadline.
Companies in numerous sectors including hospitality have complained that energy costs combined with broader inflationary pressures and souring consumer sentiment have left them on the brink of ruin.
The business secretary will next week hold talks with dozens of private sector bosses as the government contends with a significant corporate backlash to Labour’s first fiscal event in nearly 15 years.
Sky News has learnt that executives have been invited to join a conference call on Monday with Jonathan Reynolds, in what will represent his first meaningful engagement with employers since Wednesday’s budget statement.
Rachel Reeves, the chancellor, unsettled financial markets with plans for billions of pounds in extra borrowing, and unnerved business leaders by saying she would raise an additional £25bn annually by hiking their national insurance contributions.
An increase in employer NICs had been trailed by officials in advance of the budget, but the lowering of the threshold to just £5,000 has triggered forecasts of a wave of redundancies and even insolvencies across labour-intensive industries.
Sectors such as retail and hospitality, which employ substantial numbers of part-time workers, have been particularly vocal in their condemnation of the move.
Follow Sky News on WhatsApp
Keep up with all the latest news from the UK and around the world by following Sky News
On Friday, the Financial Times published comments made by the chief executive of Barclays in which he defended Ms Reeves.
“I think they’ve done an admirable job of balancing spending, borrowing and taxation in order to drive the fundamental objective of growth,” CS Venkatakrishnan said.
More on Budget 2024
Related Topics:
His was a rare voice among prominent business figures in backing the chancellor, however, with many questioning whether the government had a meaningful plan to grow the economy.
Mr Reynolds held a similar call with business leaders within days of general election victory, and over 100 bosses are understood to have been invited to Monday’s discussion.
Advertisement
A spokesman for the Department for Business and Trade declined to comment ahead of Monday’s call.
The cost of government borrowing has jumped, while UK stocks and the pound are up, as markets digest the news of billions in borrowing and tax rises announced in the budget.
While there was no panic, there had been concern about the scale of borrowing and changes to Chancellor Rachel Reeves’s fiscal rules.
At the market open on Friday, the interest rate on government borrowing stood at 4.476% on its 10-year bonds – the benchmark for state borrowing costs.
It’s down from the high of yesterday afternoon – 4.525% – but a solid upward tick.
The pound also rose to buy $1.29 or €1.1873 after yesterday experiencing the biggest two-day fall in trade-weighted sterling in 18 months.
On the stock market front, the benchmark index, the Financial Times Stock Exchange (FTSE) 100 list of most valuable companies was up 0.36%.
The larger and more UK-focused FTSE 250 also went up by 0.1%.
While there was a definite reaction to the budget, uniquely impacting UK borrowing costs, the response is far smaller than after the UK mini-budget.
Many forces are affecting markets with the upcoming US election on a knife edge and interest rate decisions in both the UK and the US coming on Thursday.
Advertisement
This breaking news story is being updated and more details will be published shortly.
Please refresh the page for the fullest version.
You can receive breaking news alerts on a smartphone or tablet via the Sky News app. You can also follow @SkyNews on X or subscribe to our YouTube channel to keep up with the latest news.
What you need to know is this. The budget has not gone down well in financial markets. Indeed, it’s gone down about as badly as any budget in recent years, save for Liz Truss’s mini-budget.
The pound is weaker. Government bond yields (essentially, the interest rate the exchequer pays on its debt) have gone up.
That’s precisely the opposite market reaction to the one chancellors like to see after they commend their fiscal statements to the house.
In hindsight, perhaps we shouldn’t be surprised.
After all, the new government just committed itself to considerably more borrowing than its predecessors – about £140bn more borrowing in the coming years. And that money has to be borrowed from someone – namely, financial markets.
But those financial markets are now reassessing how keen they are to lend to the UK.
More on Budget 2024
Related Topics:
The upshot is that the pound has fallen quite sharply (the biggest two-day fall in trade-weighted sterling in 18 months) and gilt yields – the interest rate paid by the government – have risen quite sharply.
This was all beginning to crystallise shortly after the budget speech, with yields beginning to rise and the pound beginning to weaken, the moment investors and economists got their hands on the budget documentation.
Advertisement
Please use Chrome browser for a more accessible video player
0:33
Chancellor challenged over gilt yield spike
But the falls in the pound and the rises in the bond yields accelerated today.
This is not, to be absolutely clear, the kind of response any chancellor wants to see after a budget – let alone their first budget in office.
Indeed, I can’t remember another budget which saw as hostile a market response as this one in many years – save for one.
That exception is, of course, the Liz Truss/Kwasi Kwarteng mini-budget of 2022. And here is where you’ll find the silver lining for Keir Starmer and Rachel Reeves.
The rises in gilt yields and falls in sterling in recent hours and days are still far shy of what took place in the run up and aftermath of the mini-budget. This does not yet feel like a crisis moment for UK markets.
But nor is it anything like good news for the government. In fact, it’s pretty awful. Because higher borrowing rates for UK debt mean it (well, us) will end up paying considerably more to service our debt in the coming years.
And that debt is about to balloon dramatically because of the plans laid down by the chancellor this week.
And this is where things get particularly sticky for Ms Reeves.
In that budget documentation, the Office for Budget Responsibility said the chancellor could afford to see those gilt yields rise by about 1.3 percentage points, but then when they exceeded this level, the so-called “headroom” she had against her fiscal rules would evaporate.
In other words, she’d break those rules – which, recall, are considerably less strict than the ones she inherited from Jeremy Hunt.
Which raises the question: where are those gilt yields right now? How close are they to the danger zone where the chancellor ends up breaking her rules?
Short answer: worryingly close. Because, right now, the yield on five-year government debt (which is the maturity the OBR focuses on most) is more than halfway towards that danger zone – only 56 basis points away from hitting the point where debt interest costs eat up any leeway the chancellor has to avoid breaking her rules.
Now, we are not in crisis territory yet. Nor can every move in currencies and bonds be attributed to this budget.
Follow Sky News on WhatsApp
Keep up with all the latest news from the UK and around the world by following Sky News
Markets are volatile right now. There’s lots going on: a US election next week and a Bank of England decision on interest rates next week.
The chancellor could get lucky. Gilt yields could settle in the coming days. But, right now, the UK, with its high level of public and private debt, with its new government which has just pledged to borrow many billions more in the coming years, is being closely scrutinised by the “bond vigilantes”.